It's official - Britain is in deflation

The UK has tipped into deflation - with overall prices for goods and services
falling - for first time since records began

Britain has tipped into deflation for the first time in more than half a century.

Prices, as measured by the consumer prices index (CPI), fell by 0.1pc in the year to April, following zero inflation in February and March.

This is the first time Britain has fallen into deflation since official records began in 1996. Modelled data produced by the Office for National Statistics (ONS) suggest it is also the lowest rate since 1960.

Economists had predicted inflation would remain at zero in April. However, most said negative inflation in the UK was likely to be short-lived.

The biggest drag on inflation last month was a 3pc fall in food prices and cheaper diesel and petrol costs, which fell by 12.3pc in the year to April, even though prices have bounced back over the past few months. The ONS said these two components alone dragged down the headline rate by 0.7 percentage points.

The timing of the Easter holiday - which pushed up travel costs in last year's calculation - but did not affect this year’s data - also dragged the headline rate down by 0.1 percentage points, according to the ONS. "Price changes for these fares between March and April vary notably year on year, with the timing of Easter a likely factor," it said.

The Bank of England forecast that Britain would dip into deflation in April, but Governor Mark Carney has consistently said that any period of negative inflation is likely to be temporary, and will not morph into the pernicious deflation seen in countries such as Japan.

George Osborne, the Chancellor, said on Tuesday: “Today we see good news for family budgets with prices lower than they were a year ago.

"As the Governor of the Bank of England said only last week, we should not mistake this for damaging deflation. Instead we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing.

"Of course, we have to remain vigilant to deflationary risks and our system is well equipped to deal with them should they arise.”

Samuel Tombs, an economist at Capital Economics, said negative price growth was likely to last "for one month only".

"CPI inflation should return to positive territory in May, as the effect of the shifting timing of Easter ceases to depress it and as the negative contribution from energy and food prices starts to fade," he said.

However, Mr Tombs added that the strength of the pound meant it would be "another couple of years" before CPI inflation returned to the Bank of England's 2pc target.

The Bank believes inflation will rise to 2.1pc by 2017, while the Office for Budget Responsibility (OBR) - the Government's official forecaster, does not believe inflation will reach 2pc until 2019.

The ONS said core inflation, which strips out volatile elements such as food and energy, stood at 0.8pc in April, from 1pc in March. This is the lowest level since March 2001.

The retail prices index (RPI), which is no longer an official statistic, but is still used to calculate pay deals and rail fare increases, grew by at 0.9pc in April compared with a year ago, unchanged from March.

The RPI measure of inflation, which includes mortgage interest costs, turned negative for eight months in 2009 after the Bank of England slashed interest rates to a record low of 0.5pc.

Dominic Bryant, an economist at BNP Paribas, could drive prices of clothing, footwear and household goods lower in the coming months. However, he added: "The drag from the appreciation seen up to mid-2014 is now approaching its maximum and should begin to fade from mid-year.

"With stronger private sector wage growth also likely to start imparting some upward pressure on services price later this year, we expect to see core inflation pick up on a more sustained basis during the second half of 2015."

The pound fell by almost two cents against the dollar on Tuesday morning, to $1.5528.

"The drop in core inflation in April may have taken quite a few by surprise and, therefore, could have an impact on market expectations for interest rates," said Mr Bryant. "However, today’s print quite likely marks the bottom for core and headline inflation. Both will remain low in the next few months, but both will end the year notably above current levels."